Volatility Spikes and Momentum

This paper provides evidence that, in recent years, markets have experienced more frequent volatility shocks, but those volatility shocks have reversed more quickly than in past years. This combination of more frequent volatility shocks and quicker recoveries from those shocks helps explain the weak recent performance of the momentum factor. One implication of the paper’s results is that, if volatility spikes remain commonplace and continue to reverse quickly, the momentum factor is likely to continue to perform poorly. A second implication is that if investors continues to use momentum in their investment process, they should dampen or even avoid momentum signals when stock price moves coincide with volatility spikes.